Does Sending Alberta Oil Sands Crude East Make More Sense?

CBC

Posted:
05/14/2012 7:24 am EDT
Updated:
07/14/2012 5:12 am EDT

Former Bank of Canada governor David Dodge is not a man for wild ideas. So his recent suggestion that it might make more sense to send the bitumen from the Alberta oilsands to Eastern Canada, rather than piping it to the West Coast for shipment to Asia, was clearly designed for the nation's boardrooms. (Alamy photo) | alamy

Former Bank of Canada governor David Dodge is not a man for wild ideas. So his recent suggestion that it might make more sense to send the bitumen from the Alberta oilsands to Eastern Canada, rather than piping it to the West Coast for shipment to Asia, was clearly designed for the nation's boardrooms.

Dodge saw the opposition that's been mounting among B.C. mayors, environmentalists and native groups for the proposed westward routes, and told the Edmonton Journal that any increased costs in going east and eventually reaching a tidewater port wouldn't be "wildly different."

This eastward speculation, however, is nothing new. Other policy thinkers, notably Frank McKenna and Derek Burney, both former ambassadors to the U.S., have touted the idea. But now it appears that some of the big players in Canada's oil and gas industry are turning at least some of their attention in that direction as well.

TransCanada Corp. — which has now applied again for a U.S. presidential permit for its Keystone XL pipeline from the Canadian border to the Gulf Coast — has also indicated it would consider transforming its main natural gas line to oil in order to ship more of Alberta's crude and oilsands bitumen to refineries in Ontario and New Brunswick.

This eastern talk comes at a time of considerable uncertainty in the Canadian oilpatch, some of it due to the fact that Western Canadian crude has been fetching a much lower price for months now because of a glut in its main U.S. market in the middle of the continent.

At the same time, the two main Western pipeline options on the table — which would take Alberta's oil closer to the booming energy markets in Asia — face controversy and opposition, some of it even showing up on Bay Street in Toronto.

Getting more southern access to the refinery-rich U.S. Gulf Coast has also proved problematic, with the delays and opposition in parts of the U.S. to Keystone XL.

"What we need is the access to the markets," says Greg Stringham, vice-president of oilsands and markets for the Canadian Association of Petroleum Producers.

But would going east be the answer?

"Really, we're not in the position of saying it's this or that. We want to make sure they all go through the process and the market is going to speak to that."

Still, Stringham has good things to say about some of the proposals that are looking east.

"Clearly it's on our agenda, and it is something that we see as being quite valuable to be able to make sure that Canadians have access to Canadian oil," says Stringham.

"The market will make a decision as to how much goes and where it goes, but clearly having that access is something we have been looking forward to."

As things stand, Enbridge has a plan before the National Energy Board for a reversal of a section of its Line 9 pipeline in Ontario, which would ultimately clear the way to get more Western oil refined in that province.

The line currently runs from Montreal to Sarnia, mainly to bring in oil from the Middle East and elsewhere. The reversal, actually a re-reversal as the line has gone from west to east in the past, would affect a section of the pipeline running from Sarnia to Westover, near Hamilton. But Enbridge is also considering extending the reversal all the way to Montreal.

The company also sees possibilities of shipping Western Canadian oil to Irving refinery facilities in the Maritimes, the Globe and Mail reported last week.

Potential pluses

Refineries in Eastern Canada take some oil from Newfoundland's offshore wells, but much of their raw material comes — at a higher price — from international sources.

At Imperial Oil, which has refineries in Ontario, spokesman Pius Rolheiser is equally reluctant to overtly favour any one route out of the oilsands over another. But he, too, sees potential pluses in looking east from Alberta.

"Obviously having the transportation in place from Western Canada to Eastern Canada expanded from what it is today would be positive not only for refineries in Eastern Canada but also for oilsands producers in Western Canada," he says.

Imperial ships some diluted bitumen via pipeline, primarily from its operation at Cold Lake, Alta., for refining in Sarnia, Ont.

"Most of the refineries in Ontario and certainly more so in the Midwest, Chicago area, south of the border, are equipped to run heavier crude," he says.

For TransCanada Corp., one eastward option would be converting its natural gas mainline to oil.

It runs 14,000 kilometres from the Alberta-Saskatchewan border to where Quebec meets Vermont and is only operating at about half-capacity at the moment because of all the shale gas discoveries in the central and eastern U.S. But that would involve considerable engineering as well as, probably, rejigging some of TransCanada's existing long-term gas contracts.

TransCanada did not respond to requests for an interview, and CEO Russ Girling has said it is premature to discuss specifics of what the company has in mind.

'Technically feasible'

There are "integrity issues" that come from switching a natural gas pipe to an oil pipe, but that is something TransCanada did in building the first stage of its Keystone system, which delivers Alberta crude to refineries in Illinois and a big storage hub in Cushing, Okla.

"I think it's likely technically feasible that we can make something like that work," Girling told reporters after the company's annual meeting on April 27.

"We are going to actively pursue it and see if we can turn it into an opportunity for both, the oil and gas industry and TransCanada," he said at the time.

Paul Lechem, managing director of equity research at CIBC World Markets in Toronto, doesn't doubt that TransCanada could technologically handle a gas-to-oil pipeline conversion. "I think the key question really is around the commercial support for it at this point in time."

The suggestion here is that investors might be cautious about backing such a project right now given the number of other pipelines that are being proposed either to B.C. or the U.S. Gulf Coast.

"But long term, especially if either Keystone XL … doesn't get built for whatever reason, or the West Coast pipelines get delayed or don’t get built, then certainly the economics and the viablity around shipping it to the East Coast become more attractive," Lechem says.

Jack Mintz, the head of the University of Calgary's School of Public Policy, has also questioned the economics of going eastward.

Writing in the Financial Post, he said that Canada would gain in jobs and growth by building to the west. "Less clear is whether an East Coast pipeline will be economic to meet Canada's objective of oil-market diversification away from the United States."

The disparity between the West Texas Intermediate (WTI) price for Western crude and the international price that governs U.S. Gulf Coast pricing "suggests that perhaps exporting oil via the East Coast can make money," Mintz wrote in December, after U.S. President Barack Obama had delayed construction of Keystone XL.

"However, most forecasts suggest that this pricing advantage will disappear in two or three years as new pipelines are built from Cushing to the Gulf Coast."

How do you predict the future?

Mintz's observation underscores the big economic question that surrounds any infrastructure project: how do you balance what you know and think you need now against what might happen in the future.

"That's always a hard thing to do right and it's always a challenge because of course you want to get the right amount of infrastructure in place ahead of a critical need so that you don’t have pinch points," says Brenda Kenny, president of the Canadian Energy Pipeline Association.

And she sees obvious pinch points in the current pipeline system in North America.

"The ripple effect up into Canada is in the order of billions of dollars every year of lost revenue," money, she says, that would lead to reinvestment and jobs and new technologies.

"So I’m not fussed about the risk that, perhaps, if right now people chose to look more seriously at an East Coast pipeline and then 20 years from now decided it was only used half as much as they had expected.

"I think you can see on the long term those pieces of infrastructure can still add a great deal of value."

Kenny shies away from taking a particular position on any eastward pipeline idea, and considers it important that there be a "good public policy dialogue" on future pipeline development in Canada.

"Any time you have choices in place, you'll find that markets work better and when markets work better, consumers get better prices."

The oil and gas industries accounted for around $65 billion of economic activity in Canada annually in recent years, or slightly less than 5 per cent of GDP. Source: Canada Energy Research Institute

Canada exported some 12,000 cubic metres of oil per day in 1980. By 2010, that number had grown to 112,000 cubic metres daily. Source: Canadian Association of Petroleum Producers

Canada refined 300,000 cubic metres daily in 1980; in 2010, that number was slightly down, to 291,000, even though exports of oil had grown tenfold in that time. Source: Canadian Association of Petroleum Producers

Despite talk by the federal government that it wants to open Asian markets to Canadian oil, the vast majority of exports still go to the United States -- 97 per cent as of 2009. Source: Natural Resources Canada

Canada's proven reserves of 175 billion barrels of oil -- the vast majority of it trapped in the oil sands -- is the second-largest oil stash in the world, after Saudi Arabia's 267 billion. Source: Oil & Gas Journal

One-third of Canada's oil sands bitumen stays in the country, and is refined into gasoline, heating oil and diesel. Source: Natural Resources Canada

Despite its reputation as the undisputed centre of Canada's oil industry, Alberta accounts for only two-thirds of energy production. British Columbia and Saskatchewan are the second and third-largest producers. Source: Natural Resources Canada

Alberta' government will reap $1.2 trillion in royalties from the oil sands over the next 35 years, according to the Canadian Energy Research Institute.

Thanks to improvements in energy efficiency, and a weakening of the country's manufacturing base, oil consumption in Canada has had virtually no net change in 30 years. Consumption went from 287,000 cubic metres daily in 1980 to 260,000 cubic metres daily in 2010. Source: Source: Canadian Association of Petroleum Producers

The National Energy Board says oil and gas employs 257,000 people in Canada, not including gas station employees. And the Canadian Association of Petroleum Producers says the oil sands alone will grow from 75,000 jobs to 905,000 jobs by 2035 -- assuming, of course, the price of oil holds up.